Public Bill Committee

[Mr. Roger Gale in the Chair]

(Except clauses 1, 3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration) - Clause 65

Charge on benefits received by former owner of property: late elections

Roger Gale: Good morning and welcome back. I trust that you are all refreshed.
We are about to dispatch clause 65, as the hon. Member for Chipping Barnet has indicated to me that she does not wish to have a formal vote on amendment No. 212.

Clause 65 ordered to stand part of the Bill.

Clauses 66 and 68 ordered to stand part of the Bill.

Schedule 19

Alternatively secured pensions and transfer lump sum death benefit etc

Stephen Timms: I beg to move amendment No. 134, in schedule 19, page 228, line 9, leave out from ‘arrangement’ to end of line 11.

Roger Gale: With this it will be convenient to discuss Government amendment No. 135.

Stephen Timms: I welcome you back to the Chair, Mr. Gale, refreshed after the break and raring to go, as I am sure we all are.
 I am pleased to have the opportunity to speak to the two Government amendments and I shall say a few words about what we are doing with schedule 19. The amendments will make minor drafting changes. Amendment No. 134 clarifies the fact that there will be no further charge to inheritance tax on the death of a dependant where the left-over funds in an alternatively secured pension—ASP—were chargeable to inheritance tax on the death of a scheme member. AmendmentNo. 135 ensures that the changes to remove an option to transfer funds on death from an ASP fund will not affect any members with ASPs who died before 6 April 2007.
 I shall briefly remind the Committee of the principles that we have set out in relation to pensions tax relief. The key point is that generous tax relief is provided to encourage and support pension saving that will produce an income in retirement. Pensions tax relief is intended neither to support pre-retirement incomes, nor to support open-ended asset accumulation or bequests. Pension savings are necessarily less flexible than other savings—they are locked away until retirement—which is why it is right to provide favourable tax treatment for pensions savings.
In 2005-06, the tax incentives to encourage people to save for retirement totalled about £14 billion. The best way to secure an income in retirement is via a scheme pension or an annuity. At the time of the 2006 pre-Budget report, we published a paper on the annuities market that explained the underlying policy and the academic evidence base for that policy, and responded in detail to the views of the Pensions Commission on that area.
As we developed our proposals for the new pensions tax regime, the A-day regime, we received a number of representations from groups with principled, religious objections to the pooling of mortality risk in annuities. Therefore, in the December 2003 consultation document “Simplifying the taxation of pensions”, the Government set out our proposals for the ASP. That option and the rules that apply to the sums remaining on the death of member of an ASP were enacted in the Finance Act 2004. Our intentions in doing that were very clear, but it was apparent that some people wanted to use ASPs for uses other than providing a pension.
Some changes were therefore announced in the pre-Budget report in 2006. I will remind the Committee of what it said:
“In line with the principle that pensions tax relief is provided to produce an income in retirement, the Government will bring forward legislation to make changes to the rules governing Alternatively Secured Pensions (ASPs). This will introduce a new requirement to withdraw a minimum level of income each year from an ASP fund. The facility to transfer funds on death as a lump sum to pension funds of other members of the scheme will be removed from the authorised payments rules, with these payments attracting an unauthorised payments charge.”
Clause 68 and schedule 19 change the ASP rules in line with the announcements that we have made. I would be very happy to go through the detail of the proposals, but for now I simply commend the amendments and the schedule to the Committee.

Mark Hoban: May I, too, welcome you back to the Chair, Mr. Gale? It is a remarkable testament to the lure of the Committee that my hon. Friend the Member for Rayleigh, now the shadow Minister for Europe, has come back to enjoy the proceedings for one last time. We look forward to the debut of my hon. Friend the Member for South-West Hertfordshire later this week, who has joined our Front-Bench team.
 It seems like only a year ago that we last discussed the taxation of ASPs. I then debated with the Economic Secretary, and I had rather hoped for a re-run, but I understand that he is currently in Luxemburg at the ECOFIN meeting, so the Chief Secretary will be dealing with this issue. It is quite remarkable that it is only a year since we last debated these changes, and at that time the House and the Government had settled views on what was the appropriate rate of taxation for ASPs, yet here we are, a year later, with yet another U-turn on pensions policy, discussing a different way of taxing ASPs.
Given the nature of the Chief Secretary’s introduction, we are effectively having a stand part debate here. I will ask him to respond to some particular issues in detail later, but it is worth noting, by way of introduction, that the issue of compulsory annuitisation and the role that ASPs play in tackling it continues to create interest in this House and in the other place. Indeed, on Second Reading of the Pensions Bill just before the recess, Baroness Hollis, a former Minister at the Department for Work and Pensions, stated:
“As others have already said, given the growth of DC schemes we need a fresh look at the annuities-at-75 rule, which is increasingly absurd. After all, a man on median earnings, contracted in, after 40 years on 4 per cent. plus 4 per cent. contribution—a very modest scheme—will have a DC pot of £240,000, £100,000 more than necessary to float him off income-related benefits if he annuitised to that degree... So this is not—I repeat, not—a matter only for the rich any more, but for those on average earnings and a standard rate tax.”—[Official Report, House of Lords, 14 May 2007; Vol. 692, c. 39-40.]
I think that the noble Lady was right. In the past, the Government have criticised moves to end compulsory annuitisation on the back of the argument that it is there only to help the wealthy, but as she rightly said, the growth of defined contribution schemes and the move away from defined benefit schemes means that more and more people have an interest in compulsory annuitisation at 75, and it will be a growing issue. The Chief Secretary explained how the Government’s thinking on this issue has evolved over the last few months and rightly highlighted the fact that the genesis of this measure came from the theological concerns of the Plymouth Brethren, who objected to the pooling of mortality.
Interestingly, the Treasury considered, in the regulatory impact assessment, ending the scheme or restricting discrimination on the grounds of religion, but thankfully that idea was dismissed. In looking at how this product should be sold, at one stage, the Financial Services Authority considered, and issued guidance, that financial advisers should inquire about the religious beliefs of potential purchasers of ASPs. That indicates that the debate that took place last summer and in the autumn became rather overheated and rather too focused on the origin of the idea of why we should have ASPs, rather than on thinking about how best to put the policy into practice.
I could talk about those arguments at some length, but I suspect that this is probably not the occasion to do so. There may be an opportunity to rehearse those arguments at a later stage. I want to concentrate instead on the particular changes that are being made by schedule 19. I understand the reasons for the Chief Secretary tabling the amendments and I have no particular quibbles with them, but I want to focus on a number of issues.
The first issue is how the schedule introduces new rules on the minimum income that can be drawn down from a fund, as well as increasing the maximum draw-down. It introduces a minimum of 55 per cent. and raises the maximum from 70 to 90 per cent. Those are the Government Actuary’s Department rates, as set at the age of 75, but people who have ASPs get older, and there is a serious argument to be made for reviewing the rates that can be used so that the draw-down is based not on GAD rates at 75, but on the ASP member’s actual age. As someone gets older, the opportunity to withdraw funds from their ASP will increase and my concern is that, by not allowing that flexibility to change or for people to draw down more later in life, the unutilised pot that is left on death will grow.
If the Government increased the rates used for the ages of 75, 85 or 95, that would give the ASP holder the opportunity to withdraw more of their income from the plan and to ensure that there was very little of it left at the time of death. The Government’s objective of using tax-relief savings to meet income in retirement would be achieved more fully than under their current proposals.
The other comment that has been made about the draw-down rules is that for unsecured pensions—the situation that arises before the age of 75—the maximum draw-down is not 90 but 120 per cent. of the GAD rate. There does appear to be a mismatch, or a discontinuity, between the rules that apply for unsecured pensions and those for ASPs. It would be helpful if the Chief Secretary addressed the reason for that inconsistency between the draw-down rules for ASPs and USPs, and also explained why there is not an uprating or revision of the maximum draw-down based on someone’s actual age, rather than the rates set at the age of 75.
The second point is about the exit charge on death. Effectively, the Bill introduces an 82 per cent. tax charge on death when the member dies and there are no financial dependants, or where the balance of the pot does not go to a charity. The 82 per cent. charge arises because there is both an inheritance tax charge of 40 per cent. and a charge of 55 per cent. on the unutilised costs. The 55 per cent. charge normally applies where the value of a pension fund exceeds the lifetime allowance. That appears to be quite a high charge and has certainly caused some comment among financial advisers as to why a 55 per cent. charge is applied in addition to the 40 per cent. charge.
I would understand it if the Chief Secretary said that, based on the Government’s principle that tax relief savings should not be used to fund benefits or to enable a pension pot to be passed from a person to members of their family, particularly where there are no financial dependants, it is important to recover all the tax relief gained or obtained by any pension fund member. I could accept that—it would be appropriate to try to claw back that tax relief. I understand that that tax relief is clawed back at a rate of about 55 per cent. That goes back to the situation in which the pension fund value exceeds the lifetime allowance.
I would be grateful if the Chief Secretary advised the Committee at what rate the Government will recover the tax relief given on pension fund savings. That is important when assessing what the right level of the tax charge on death should be. There is, however, another inconsistency. I referred earlier to USPs. In those, different rules apply on the death of a member. If a USP member dies without drawing any pension benefits, his pension pot is transferred to his nominated beneficiaries free of inheritance tax. If he had started to draw benefits, a 35 per cent. charge would be levied on that pot.
Legislation intended to simplify pensions back in 2004 is now creating different tax charges depending on when someone dies. Somebody who died aged 74 years 364 days without having drawn their pension could pass their pension pot on free of tax. If, however, they died a couple of days later, or even some minutes or hours later, an 82 per cent. charge could be levied on their pension pot. That does not strike me as a consistent set of regulations to cover what is a difficult area.
I would also like to ask what the Government believe the impact of the 82 per cent. charge will be. The regulatory impact assessment is silent about the additional revenue that the measure will produce, or what impact it will have in saving or protecting tax revenues. Given the wide interest in ASPs, it is important that the Government are more transparent about what they consider to be the revenue implications of introducing the 82 per cent. charge, and what those implications would be if that charge were not introduced and the rate agreed in last year’s Finance Act continued to hold. It would be useful if the Chief Secretary said what modelling the Treasury has done to assess what would have happened if those changes, particularly on the exit charge, had not taken place.
Finally, I would like to touch on three other matters of concern that have been raised with me. The first is in paragraph 2 of the schedule. The Finance Act 2004 introduced ASPs and led to simplification of the pension tax system. It also allowed for annuity payment scheme pension payments and payments from ASPs to be guaranteed for up to 10 years. Therefore, if a member died within 10 years, the payments would continue. Paragraph 2 withdraws that guarantee for ASPs, although it remains in place for annuities and scheme pensions. I would be grateful if the Chief Secretary explained why that change was made only for ASPs.
In paragraph 12, there is a further change that has raised some concerns. When a member of a small self-administered scheme, or SSAS, dies, the funds that he has built up are distributed to other members as an increase in their rights. That reduces the cost of the benefits to the remaining members and to the employer, in the same way that in a large defined-benefit scheme the cost to members is reduced by any savings coming from deceased members. The SSASs are important for many small businesses, and there is a concern that the changes set out in paragraph 12 of schedule 19 will increase the cost to small and medium-sized enterprises by levying a 55 per cent. charge on reallocations within SSASs. Will the Chief Secretary confirm whether SSASs are caught by the changes outlined in paragraph 12?
On paragraph 20, in cases where there is an unutilised pot at the time of death, that ASP pot is top-sliced in the IHT calculation. In the pre-Budget report, however, the nil rate band was to be apportioned between the ASP and the rest of the estate. I would be grateful to the Chief Secretary if he could explain why that change has taken place. Will he also confirm that, where the rest of the estate does not exhaust the nil rate band, the unutilised amount will be offset against ASPs, thus reducing the IHT bill?
The changes in schedule 19 are quite difficult and they will start to have two effects. As the Government intend, they make life difficult for those who want to exercise greater control over their pensions by increasing the exit charge on death and restricting the draw-down of funds so that there will always be a significant pot left on which the 82 per cent. effective rate can be charged. The changes also create a degree of administrative complexity, for example—I have already touched on this—there are particular rules about the circumstances in which pension pots are passed on to dependants, what happens when that dependant dies and what rate of inheritance tax is applied to those funds. We need to go back to the inheritance tax calculation of the original ASP member. Changes such as those are quite complicated and hard for people to understand. There is a niggling doubt at the back of my mind that they are meant to discourage, and make life difficult for, those who want to exercise control over the use of their pension funds in retirement.
The reforms were not properly thought through in the first place. This is the third significant U-turn on the pensions simplification announced in 2001, and the Secretary of State for Communities and Local Government must be wondering why on earth her reforms are being unpicked, almost on an annualbasis. There appears to be a continual retrenchment away from the spirit of simplification in the Finance Act 2004 towards a more complicated and difficult system. It is remarkable for a Government who have embraced choice on schools, health care and hospitals not to embrace choice on the release of pension funds in retirement. Something is not quite right in the way in which the Government are approaching the issue.
To conclude, I go back to the comments made by Baroness Hollis in the pensions debate in the other place. I suspect that she was right, considering how the rules have evolved and become more complicated and the Government’s dogmatic opposition to an end to compulsory annuitisation, when she said that
“given the growth of DC schemes we need a fresh look at the annuities-at-75 rule, which is increasingly absurd.”—[Official Report, House of Lords, 14 May 2007; Vol. 692, c. 40.]
The complexity that the Bill introduces indicatesthat the Government’s opposition to compulsory annuitisation is introducing increasingly absurd rules.

Roger Gale: It will not have escaped the Committee’s notice that those on the two Front Benches have determined that this shall be a debate upon the schedule being agreed to, as well as the amendment. I am perfectly content with that, as long as hon. Members understand that they cannot have the same debate twice.

Brooks Newmark: I, too, welcome you back after the break, Mr. Gale.
My hon. Friend the Member for Fareham has conducted his usual forensic analysis and posed a number of searching questions. I have just three points to add. First, I believe that the Government are in danger of losing touch with the principle behind the rationalisation of the pension system that came into effect last year. The guiding principle of the pension tax simplification reforms was supposedly that, where there was a conflict between simplicity and unfairness, simplicity would prevail. I am not sure that that is a desirable maxim for legislation because the law tends to think that fairness should prevail over rigidity, but having advanced it, the Government ought to have tried to adhere to it for longer than simply one year.
The complicated new provisions for taxing residual ASP funds after a death are neither simple nor clear. However, I am sure that the increased flexibility offered to pensioners by allowing them to make use of the alternative secured pensions regime is desirable. My concern is that the system was developed in response to a specific inequity caused by religious belief, and that Ministers have clung to that rationale despite the problems that have resulted from it. It is strange peg on which to hang wide-scale pension reform.
I do not doubt the seriousness of the problem experienced by the Christian Brethren’s repudiation of pooled mortality risk. However, the Christian Brethren should perhaps have been mere beneficiaries of the introduction of alternative secured pensions, not the cause of them. An article from December last year in Pensions World—I am sure that the Chief Secretary subscribes to it—states quite rightly:
“Religion should not be a tax avoidance issue.”
 However, it should not be a cause for unnecessary complication either. The same article cites a census estimate that there are 738 members of the Christian Brethren. This seems to be a significant understatement, because when the issue was debated in 2004—I see the Chief Secretary looking at me quizzically—the figure cited was close to 14,000. Even so, for perspective, some 942 of my constituents described their religion as “Jedi” in the last census.
I am not suggesting that the Christian Brethren should lose the benefit of alternatively secured pensions, but rather that ASPs should, from their institution, have been seen as possessing wider relevance than to the Christian Brethren. At least by acknowledging that there was a wider ideological issue in play here, the Government could have avoided the introduction of a new scheme and the subsequent familiar clampdown.
My hon. Friend the Member for Tatton (Mr. Osborne) tried valiantly in 2004 to engage the then Financial Secretary, the right hon. Member for Bolton, West (Ruth Kelly) in such an ideological debate by suggesting that ASPs should be seen in the wider context of the trickle-down of wealth from one generation to another. In a colourful debate, he quoted from both Corinthians and Timothy, but sadly the Book of Ruth was a little less forthcoming in the response.
My hon. Friend eventually dredged up an actuarial relic in the form of a tontine, to try to get to grips with some of the consequences of ASPs and how trickle-down of residual lump sums might work in practice. Tontines, as I have found, allow funds contributed by participating scheme members to devolve to the last man or woman standing. They certainly captured the imagination of the hon. Member for Wolverhampton, South-West, who correctly observed their crucial importance to Victorian and Edwardian murder mysteries, due to the unfortunate habit of participants bumping each other off in order to claim the funds. If the ministerial pension scheme were run on that basis, there would perhaps be fewer candidates for the Labour deputy leadership.

Rob Marris: I never said that.

Brooks Newmark: But I did.
My point is that the Government tried hard in 2004 to avoid engaging with the issue of the inevitable trickle-down of wealth from ASPs. About as close as we got was the then Financial Secretary’s admission that
“if we find that people intend to use the alternatively secured pensions to bequeath any unused funds to their dependants, we will of course review the provisions, and we could consider ways to tighten up the proposals to make that a very unattractive option.”—[Official Report, 7 July 2004; Vol. 423, c. 919.]
But the failure to deal with the issue head-on in 2004 is the reason for the draconian measures in this year’s Bill.
There have been more reverse gears used in the Chancellor’s treatment of pensions than are commonly associated with second world war Italian tanks. [Interruption.] Not Italian; second world war. I love the Italians. This heavy-handed crack-down on ASP lump sum transfers on death is just the latest example of what I have just described.
 I would be heartened if the Government gave up on the justification of “principled religious objection” and looked again at the wider issue of allowing pension funds to be preserved and transferred. If the provision of tax relief on pension contributions is to encourage healthy provision in old age, it should follow that lump sum transfers should be preserved for that purpose, rather than being wiped out by punitive taxation. For example, allowing lump sum transfers to non-dependent children, which would then count towards their own pension’s lifetime allowance, would encourage independence from means-tested support and would still achieve value in return for the income tax that the Government have forgone.
 My second point also concerns inevitability. It was inevitable that there would be plenty of takers using ASPs for non-religious reasons and it was impracticable that any test of faith should be applied to them, which the Government have at least admitted. There was a chorus of warnings in 2004 and, rightly, a chorus of “I told you so” now. However, it does not take too much Sibylline talent to have predicted the use of ASPs to pass on wealth, so I would like to ask the Chief Secretary to provide the Treasury’s original prediction of ASP uptake and what the uptake has in fact been? I am sure that those figures are available in the old regulatory impact assessment, but if he has them to hand, I would be grateful if he could share them.
 My final point concerns the change to the maximum draw-down from an ASP under paragraph 2 of schedule 19. I believe that my hon. Friend the Member for Fareham has already asked why the figure should now be set at 90 per cent. as opposed to a higher figure and, throughout our debate, he has spoken persuasively about the need for consistency. However, I would like to probe the Chief Secretary further as to why the magic number for draw-down was 70 per cent. in 2004, but can be raised to 90 per cent. and no higher in 2007.
I presume that the 70 per cent. figure was arrived at on the basis of an analysis of the risk that some ASP holders would run out of capital. Indeed, that appears to be the case. In 2004, the then Financial Secretary said that, with maximum draw-down set at 70 per cent., only one in 20 people could expect their income from an ASP to fall to a third of its initial value; on the contrary, she said, if people were allowed a draw-down equivalent to 100 per cent. of the maximum annuity, 30 per cent. of people would be placed in a similar situation. I would therefore first like to ask the Chief Secretary whether he believes that these relative risks are still accurate, and secondly what has changed to justify the increased draw-down and the consequently increased risk? Were the Government wrong then and if so, why is the 90 per cent. limit correct now?

Stephen Timms: Perhaps I should begin by expressing congratulations—I am sure I do so on behalf of the whole Committee—to the hon. Member for Rayleigh on his promotion to shadow Minister for Europe. I think that he has already got a little bit of business from the debate that we have just had. Nevertheless, we are delighted that he is with us and we look forward to hearing from him during the course of the morning.
To respond to the hon. Member for Fareham, let me give a little more detail about what the schedule does. We indicated in the pre-Budget report that we would require a member of an ASP to be paid a pension of at least 65 per cent. of a comparable annuity for a 75-year-old. We subsequently received a number of representations about the level of minimum income, and that led to the announcement in the Budget that we would reduce that figure to 55 per cent. This is not an exact science—it is a matter of finding a balance—but we concluded that that was the right level in order to reduce the danger of exhausting funds prematurely.
Where the minimum income is not paid, there will be a charge on the scheme administrator on the difference between the minimum income requirement and the amount of pension paid out in the year. The maximum withdrawal permitted from an ASP fund will be increased to 90 per cent. of a comparable annuity of a 75-year-old. That figure was also mentioned by the hon. Member for Fareham. The maximum withdrawal ensures that the ASP fund is not depleted too quickly and will continue to provide a pension for the remainder of the member’s life. That is an important consideration, and raising it to 90 per cent. provides a range within which the member can choose to draw an income to suit his circumstances.

Mark Hoban: Perhaps I am pre-empting remarks that the Chief Secretary is about to make, but could he explain why 90 per cent. is appropriate for ASPs but 120 per cent. is appropriate for USPs?

Stephen Timms: I think that the hon. Gentleman is asking about the arrangements for draw-down prior to the age of 75, when there is, as he knows—he has already commented on it—a compulsory annuitisation requirement. The arrangements set out here are those that apply in that post-compulsory annuitisation period, in which an alternative route is now available. The considerations there are different from those that apply prior to the age of compulsory annuitisation. That is the reason for the difference in those numbers.
 To deter people from using pension funds as a tax-privileged way of accumulating capital for bequests, an unauthorised payments charge will be imposed on any ASP fund that is transferred to the pension pots of other members when an individual dies. That will not prevent members from providing pensions for their survivors. To pick up a point that was made by the hon. Member for Braintree, remaining funds may be used for a dependant’s pension or paid to charity without attracting an unauthorised payments charge.
Alongside those changes, the clause and the schedule also introduce necessary consequential changes to the inheritance tax rules, mainly to address the interaction between inheritance tax and the unauthorised payments charge where both arise on the same funds. In all cases, the inheritance tax nil rate band will be set in priority against the deceased person’s estate excluding the ASP funds. That will be advantageous for the beneficiaries of the estate in that it will speed up the process for tax-paying estates and it will allow the inheritance tax position to be settled on the ASP funds independently of the remainder of the estate.
Should both unauthorised payment and inheritance tax charges arise on the same funds, the chronological order in which the charges arise will dictate how each is determined. For example, where inheritance tax is due first, the inheritance tax liability will be calculated by reference to the gross value of the ASP fund. In recognition of the fact that the ASP funds will be subject to an unauthorised payment charge in due course, any inheritance tax nil rate band that remains available to be set against them when inheritance tax is due will be grossed up by a formula to prevent double taxation. The subsequent unauthorised payment charge will then be calculated by reference to the value of the funds net of inheritance tax. In all cases, Her Majesty’s Revenue and Customs will calculate the inheritance tax due, if any, on the left-over ASP funds and send the bill to the scheme administrator.
We have consistently made it clear that we do not wish to allow pensions tax relief to be used for purposes other than to secure an income in retirement. Some commentators have expressed the concern that if ASP funds are paid in a manner not authorised bythe pension tax rules, the combined inheritance tax on unauthorised payments charges can in some circumstances reach as much as 82 per cent., the figure named by the hon. Member for Fareham.
The two charges exist for different purposes. The unauthorised payments charge recoups those generous tax reliefs if pension savings have not been used as intended to secure a retirement income, and inheritance tax is a separate charge on wealth being passed on upon death, regardless of the form of that wealth. Together, those measures reinforce the message that the purpose of pensions tax relief is to support saving for an income in retirement and not to help accumulate capital for bequests.
However, those who have principled religious objections to annuitisation maintain the opportunity to benefit from tax relief. I am disappointed that the hon. Member for Braintree should take so lightly the religious concerns that gave rise to the change. We are not talking about something on a par with “Star Wars”, despite his rather discourteous reference. I reassure the Committee about the views of those who have religious concerns about the risk of pooled annuitisation. We have discussed the matter with them, and they wrote to my hon. Friend the Economic Secretary, after the announcements in the pre-Budget report, saying:
“We are totally satisfied with the revised provisions made by the Government and are sure they will secure the desired result.” 
In other words, the changes should not undermine our intentions when we introduced the alternatively secured pension. The hon. Gentleman cited my right hon. Friend, the then the Financial Secretary, who made it clear at the time that if we found that the arrangements were being used in ways that we did not intend, we would introduce further changes. That is precisely what we have done.
The hon. Member for Fareham queried the need for compulsory annuitisation at the age of 75, and he referred to debates in the other place. I say again that we have been consistently clear about the fact that the generous tax relief given for pension savings is to provide for an income in retirement. If one attempted to set a threshold beyond which people could use the money as they wished, and if the threshold used to obtain an annuity was set high enough for one to be sure that it would provide an income in retirement above the means-tested level throughout the remainder of the person’s life, however long they lived, only a very small proportion of annuity pots would be large enough. At most, only the biggest 5 per cent. of pension funds would be eligible to withdraw the remainder of their fund as a lump sum if that approach were taken. In reality, that is not viable.
We set the maximum ASP rate by reference to annuity rate for a 75-year-old. Insurance companies know pretty well how long on average a typical pool of people will live and, by pooling that risk at the aggregate rate, they can pay a secure income to individuals for the remainder of their lives, no matter how long that may be. However, alternatively secured pensions do not have the benefit of such mortality pooling, so limits need to be imposed in order to ensure that the fund continues to provide a level of income for members, even if they live much longer than expected. To ensure that, as I have said, the limit imposed by the rules is a maximum withdrawal rate of 90 per cent.
A number of positive remarks have been made about the changes that we are making by people in the pensions industry. Madeline Forrester, the head of UK distribution of Threadneedle Investments said:
“We are delighted the Government has finally brought more clarity to what was an area of some doubt. We think this makes the ASP a viable alternative to an annuity.”

Mark Hoban: Does the Chief Secretary not recognise that the considerable doubt in the pension industry was caused by the statements made by the Economic Secretary over the summer? A matter of weeks after last year’s Finance Act received Royal Assent, his comments about further changes created uncertainty in the market. He also talked again about the reasons why ASPs were introduced, saying that they should only be taken up by people who had religious objections. The position was clear when the 2006 Act received Royal Assent, but it became unclear after the Economic Secretary made his statements.

Stephen Timms: I do not agree. I quote to the hon. Gentleman the view of Citywire on 22 August:
“Providers and advisers are ignoring ministerial warnings that alternatively secured pensions... are only for those with religious objections to annuities.”
The intention was very clear. We have safeguarded that by the changes we are making.

Mark Hoban: The Chief Secretary needs to reflect on the fact that nothing in the legislation would prevent people other than Christians or Plymouth Brethrens from using this. Although the Economic Secretary said that it was only meant to be for people of a particular religious view—I respect those views and I understand their objections—there is nothing in law to prevent other people from using ASPs. It is another example of where the Government have created confusion where non existed before.

Stephen Timms: As long as people are using ASPs to draw an income for their retirement, there will be no difficulty. The schedule contains safeguards that ensure that the funds will be used in that way, thereby maintaining the benefits that ASPs introduced. It was made quite clear when we discussed the issue on Report last year that we would take steps to ensure that ASP rules could not be used other than as intended, to provide a pension in retirement. We are maintaining that with this Finance Bill.
Let me pick up a couple of the other points made, particularly by the hon. Gentleman. The level of the reliefs within a pension fund depend on the particular circumstances of the individual involved. We give very generous tax reliefs for pension savings, and the unauthorised payment charge at 70 per cent. ensures that all those reliefs are recovered when unauthorised payments are made. That is the appropriate approach.
The hon. Gentleman expressed concern about the wider impact on small businesses. Paragraph 12 of the schedule applies to all schemes that provide ASPs, but we have been clear from the outset that ASPs were not intended to be a product taken up in the mainstream. The changes to the rules strike a balance between the needs of those with principled objections to annuitisation and the needs of the wider public being provided with tax relief.
I think that I have answered the point about unsecured pensions. The hon. Gentleman also asked why the changes to set the inheritance tax middle-rate band against an estate have been made and whether I can confirm that the unused nil-rate band could be set against the ASP. The nil-rate band change to top-slicing the ASP ensured that it is set in priority against other assets so that non-ASP property inherited will benefit from the full nil-rate band and bear less inheritance tax. The inheritance tax will fall instead on the ASP. That change also met requests made to us by the pensions industry. I can confirm that the unused nil-rate band will be set against the ASP.
Both the hon. Gentleman and the hon. Member for Braintree said that we were undermining pension simplification by making these changes. I do not agree. The pension simplification changes have proved to be extremely successful and the initial optimism around them has certainly been maintained. The hon. Member for Braintree read out what my right hon. Friend the Secretary of State for Communities and Local Government said when the ASP was being introduced. As that quotation showed, we have made it clear that ASPs would be reviewed if used beyond their original intentions. That commitment is being fulfilled in this schedule.

Amendment agreed to.

Amendment made: No. 135, in schedule 19, page 228, line 43, leave out from ‘paid’ to end of line 2 onpage 229 and insert
‘in respect of members of schemes whose deaths occur on or after 6th April 2007.’.—[Mr. Timms.]

Schedule 19, as amended, agreed to.

Clause 69

Miscellaneous

Question proposed, That the clause stand part ofthe Bill.

Adam Afriyie: I was conscious that the Financial Secretary did not answer the question on what the expected change in revenue to the Exchequer might be under the clause in terms of inheritance tax and tax on lump sum transfers.

Stephen Timms: The changes that we are making will ensure that ASPs will be used as intended. Our projections on revenue to the Exchequer were based on that assumption. All we are doing is changing the rules to ensure that they will happen and there is no impact on revenue.

Question put and agreed to.

Clause 69 ordered to stand part of the Bill.

Schedule 20

Pension schemes etc: miscellaneous

Stephen Timms: I beg to move amendment No. 136, in schedule 20, page 232, line 25, leave out paragraph 9 and insert—
‘9 In section 166(2)(a) (when person becomes entitled to pension commencement lump sum), after “paid” insert “(or, if the person dies before becoming entitled to the pension in connection with which it was anticipated it would be paid, immediately before death)”.
9A In section 219(7) (multiple benefit crystallisation events occuring by reason of payment of lump sum death benefits treated as occurring immediately before death), insert at the end “but immediately after any benefit crystallisation event occurring immediately before the individual’s death by virtue of section 166(2).”
9B (1) Schedule 29 (authorised lump sums) is amended as follows.
(2) In paragraph 1(1) (conditions to be met if lump sum is to be pension commencement lump sum)—
(a) for paragraph (a) substitute—
“(a) the member becomes entitled to it before reaching the age of 75,
(aa) the member becomes entitled to it in connection with becoming entitled to a relevant pension (or dies after becoming entitled to it but before becoming entitled to the relevant pension in connection with which it was anticipated that the member would become entitled to it)”,
(b) in paragraph (c), for “of three months beginning with” substitute “beginning six months before, and ending one year after,”, and
(c) omit paragraph (e) (but not including the “and” at the end).
(3) In paragraph 2 (“permitted maximum”), after sub-paragraph (5) insert—
“(5A) But if the member dies before becoming entitled to the relevant pension in connection with which it was anticipated that the member would become entitled to the lump sum, the permitted maximum is the available portion of the member’s lump sum allowance.”.’.

Roger Gale: With this it will be convenient to discuss Government amendment No. 137.

Stephen Timms: The tax reforms for pension schemes and pension savings that came into effect last April remove the complexity that had led over many years to different tax rules applying across numerous types of pension scheme. As I have said, those changes have been very successful. The long-term benefit is a streamlined regime that is easier to understand and cheaper to administer, and which was, and still is, broadly welcomed by the pensions and savings industry.
 The regime was put together after close consultation with the industry over a number of years. That engagement has continued since the enactment of the FinanceAct 2004. That continuing dialogue has proved to be very useful and has led to a number of changes in this Bill to improve further the benefits of the new regime. All the technical improvements to the alignment of benefits are in response to representations from the pensions industry. The changes have been warmly welcomed. Most of them fall into one of two categories. Some are responses to either regulatory or tax changes elsewhere. The other group is wider in scope and covers a number of measures to eliminate undue restrictions on the administrative practices of schemes, and so provide greater flexibility for scheme members and administrators. Government amendments Nos. 136 and 137 belong to that second group.
 In response to representations, amendment No. 137, on the rules of pension commencement lump sums, will allow lump sums to be paid up to six months before the pension commences so long as a pension scheme is arranging for a pension to commence. That will allow schemes and pension members greater flexibility in arranging a pension. It will allow savers time to take advantage of the open market option and choose the most suitable option annuity for them, and it meets principles underlying pensions tax relief. The amendment will apply retrospectively to A-day to ensure that those lump sums that have been paid remain tax-free. It has been welcomed by the pensions industry and would ensure that tax-free lump sums can continue to be paid in a flexible way. I commend it to the Committee.

Rob Marris: My right hon. Friend referred to lump sums being taken early and the possibility of taking advantage of the open market option and so on. Will he clarify whether the amendment will also cover lump sums from public sector schemes in which the open market option is not usually taken because such schemes have final salary pensions? If he cannot clarify that now, I shall be happy for him to write to me.

Stephen Timms: I think that the answer is yes. Once the industry made it clear to us that, in practice, the lump sum was often paid in a different period from the one that the legislation assumes, we were happy to make the change. Wherever that arises, this will fix it.

Amendment agreed to.

Amendment made: No. 137, in schedule 20, page 238, line 27, after ‘9’ insert ‘to 9B’.—[Mr. Timms.]

Schedule 20, as amended, agreed to.

Clause 70

Anti-avoidance

Question proposed, That the clause stand part ofthe Bill.

Roger Gale: With this, it will be convenientto take the following: Amendment No. 213, in clause 70, page 44, line 7, leave out from ‘a’ to ‘the’ in line 9 and insert
‘pre-ordained series of transactions is carried out in connection with the disposal and acquisition, and it is undertaken in pursuance of a scheme or arrangement the only or main purpose of which is the avoidance or reduction of Stamp Duty Land Tax payable on the acquisition by P or to secure or increase a repayment of Stamp Duty Land Tax in relation to that acquisition.’.
Amendment No. 234, in clause 70, page 44, line 13, leave out ‘its disposal by V’ and insert
‘the disposal referred to in subsection (a) above’.
 Amendment No. 214, in clause 70, page 44, line 13, at end insert—
‘(1A) Transactions taking place more than three years before the acquisition of a property by P shall be disregarded for the purposes of subsection (1).’.
 Amendment No. 235, in clause 70, page 44, line 40, leave out
‘the largest amount (or aggregate amount)’.
 Amendment No. 236, in clause 70, page 44, line 42, after ‘(a)’, insert ‘the largest amount’.
 Amendment No. 237, in clause 70, page 44, line 44, after ‘(b)’, insert ‘the aggregate amount’.
Amendment No. 238, in clause 70, page 45, line 7, at end insert—
‘(c) the exercise of a statutory right of enfranchisement, extension or enlargement of a leasehold interest.’.
Government amendments Nos. 184 to 186.
 Amendment No. 239, in clause 70, page 46, line 1, leave out ‘and 75’ and insert
‘75, and schedule 7, Part 1’
Government amendments Nos. 187 to 192.
As this group of amendments contains Government amendments, I shall ask the Chief Secretary if he wishes to speak first, and then I shall come to the hon. Member for Chipping Barnet. That will not preclude the Chief Secretary from responding to anything else that is raised in the course of the debate.

Stephen Timms: Thank you, Mr. Gale, for clarifying how you intend to deal with the clause, which is the first of two that tackle stamp duty land tax avoidance schemes. It amends the Finance Act 2003 to counter two types of scheme—those that use leaseholds and those that use sub-sales that have been developed specifically to avoid payment of the tax. Clause 71 is designed to counter schemes that use partnerships as a way of avoiding tax.
The two schemes that the clause tackles seek to avoid payment of stamp duty land tax by adding extra stages into the sale of property by one party to another in such a way as to remove the need to pay tax on the transaction. We have always said that we will deal robustly with any avoidance effort along those lines. We were first made aware of the schemes late last year. We initially took action at the pre-Budget report by introducing time-limited regulations that prevented those schemes. We acted quickly because we took the view that it was unfair for those using such schemes to benefit, while most taxpayers who paid stamp duty and land tax could not use such complex avoidance arrangements. The regulations have worked well, and the industry has, on the whole, been happy with that. The clause replaces those regulations, which were introduced at the end of last year, debated in Committee and approved by the House on 15 January. 
Hon. Members might ask why we have included the clauses. First, we hope that they will prove to be more finely tuned instruments than the regulations that they replace. Not only do they target more effectively those schemes that we want to stop but, in response to representations about the regulations, they do more to protect those who are involved in innocent transactions whom the regulations might have caught inadvertently. Of course the clauses, unlike the regulations, willhave permanent effect. In introducing the regulations, we explained that they would have effect for only18 months from the date on which they were made. That has given us a chance to consult the sector and I am grateful to all those who took the time to discuss the regulations with HMRC. We have tried to accommodate their comments, and that has made for clearer legislation.
Throughout the process, we have been open to changes that will make it clear that legitimate transactions will not be caught. For example, the Government amendments are the result of further representations from the property sector. Dealing with the avoidance of stamp duty land taxes is, in many ways, different from dealing with avoidance in other areas of taxation. For example, it is much harder to establish whether the main driver in a developed scheme is avoidance of tax or not. It is also sometimes difficult to establish who benefits from schemes, as they can be arranged to benefit both the buyer and the purchaser. Therefore, where we have deviated from what we have done in other areas of taxation to prevent avoidance, we have done so simply because we have not been able to use the same types of legislation to prevent avoidance in this area.
We have been happy to listen to what groups such as the Law Society have had to say about how the clause is drafted and, where possible, we have agreed to changes that will protect those involved in legitimate land transactions.

Theresa Villiers: Does the Chief Secretary agree that a transaction caught by proposed section 75A would include the purchase of a long leasehold where the right to enfranchise is later taken up, because that involves a series of steps?

Stephen Timms: I am not sure quite how the measure would apply in the particular circumstance that the hon. Lady describes. Perhaps she would like to give a little more detail about the precise type of transaction that she envisages. The intention is to ensure that stamp duty is paid on the full value of the transaction. Artificial arrangements have been devised to try to avoid that; I do not imagine that her example is one of those arrangements. However, that is certainly the intention and I think that the effect of the clause, with the amendments that have been tabled, will be that, in whatever circumstances, the full value of the transaction will be captured for stamp duty land tax purposes.
On the Government amendments, we have made it clear that HMRC will only be allowed to use the retrospective taxation powers if it favours the taxpayer. We have clarified that only property investment partnerships are covered by the clause and that, where separate parcels of land are sold on as part of a transaction, we will use apportionment to reduce the amount of tax that purchasers might have to pay.
Making good anti-avoidance legislation involves dealing with two opposing requirements. First, we must ensure that the legislation is strong enough to stop the avoidance. Secondly, however, we do not want to entangle law-abiding businesses in its scope or make the overall tax structure any more complex. That is a fine line to walk. In tabling the amendments, we have shown that we will listen to concerns about the unexpected effects of legitimate traders and that we will act on those. I will be happy to give more details about each amendment, but I hope that, in these few words, I have explained the intention behind them.

Theresa Villiers: I want to take the Chief Secretary up on his reference to complexity. A concern that has been expressed to me is the complexity and lack of clarityin the provisions. In particular, how will proposed section 75A operate if more than one transaction could count as the notional transaction? How will the notional transaction be selected? Will it be the highest transaction, or the first transaction?

Stephen Timms: Let me come back to the hon. Lady’s original question about the purchase of a long lease with a right to enfranchise. That kind of arrangement will not be caught unless there is some connection between the transactions—for example, if they are all carried out in a very short time scale. The aim and effect of the changes is to ensure that the full value of the transaction is caught for stamp duty land tax purposes and that the full tax payable will be required. I think that intention is being delivered by the changes.
The hon. Lady makes a fair point about complexity. The clause has to be quite complex. Its aim is to counter schemes that involve the creation of complex networks to avoid paying stamp duty land tax. HMRC has already published detailed guidance on its website explaining what is and is not affected by the clause, giving examples of how it will work. If there are any uncertainties, it is happy to advise those who have queries about complex transactions on a case-by-case basis.

Theresa Villiers: If the Chief Secretary cannot answer the specific question about the possibility of multiple transactions that could qualify as a notional transaction, can he tell the Committee what will happen where there are multiple parties that could fall into the category P as defined by proposed section 75A(1)?

Stephen Timms: There may well be some quite complex arrangements where sensible questions could be raised. My advice would be that those questions should be raised directly with HMRC in the light of what is already on the website. I think that the appropriate clarification could then be provided.

Roger Gale: Before we debate the other group of amendments, may I make the point that the debate is being conducted on a clause stand part basis, so I am not putting any amendments formally at this stage? If the Opposition Front Bench or, indeed, any other hon. Member wishes to move any of the other remaining amendments formally, they will need to indicate that to me at the appropriate time.

Theresa Villiers: Thank you, Mr. Gale. I join others in welcoming you back to the Chair.
 My understanding of the reaction that the provisions have provoked among those affected by them is very much at variance with the Chief Secretary’s account of how they have been received. As ever, the Opposition would support attempts to shut down abusive and artificial tax avoidance schemes that would prevent stamp duty from being charged on transactions. However, we are concerned about the very wide scope of proposed section 75A. Although initially its provisions did not attract a huge amount of attention, considerable concern has since been expressed about their breadth.
The Chartered Institute of Taxation states:
“It is disappointing to note that despite a wide-ranging discussion of this legislation in January 2007 which identified various practical problems with its implementation, nothing has been done to tackle the major defects in the legislation... In our view the drafting of section 75A is fundamentally deficient in a number of respects... Most seriously... the section is drafted in such wide and general terms as to be almost unworkable in practice. Its general application means that it may apply to many common commercial transactions, and it appears to cut across many areas where existing SDLT legislation provides reliefs including, for example, charities and reconstruction reliefs.”
The Institute of Indirect Taxation, the Law Society and the Stamp Taxes Practitioners Group all seem to share the CIOT’s concern that innocent transactions could be caught by proposed section 75A. The Law Society points out:
“The uncertainty which this is generating is not simply the perception of a number of anxious professionals who cannot interpret the legislation and want a hand from HMRC.
Seasoned conveyancing and tax professionals have pored over this legislation and want a hand from HMRC, not with a view to picking holes in it, but with a view to understanding it so that they can give advice to clients as to the consequences of undertaking real estate transactions.
The fact that these professionals are still unclear as to the ambit of the legislation is testament to the fact that the legislation is unclear.”
Similarly, in a letter to Crispin Taylor at HMRC, the Stamp Taxes Practitioners Group stated:
“As a matter of principle, anti-avoidance legislation should be proportionate to the problem...The Stamp Taxes Practitioners Group consider that s75A goes far beyond what is necessary to deal with the type of schemes mentioned in the Technical Note issued by HMRC...and cannot on any reasonable basis be allowed to be enacted without, at the very least, major revision.”
The Government amendments to which the Chief Secretary referred help to deal with one or two problems and drafting errors, but serious issues remain unaddressed and unresolved. A key concern is that many high-street conveyancers and property lawyers who do not have access to specialist and sophisticated tax advice are unlikely to be aware of the risk that the transactions with which they are dealing could behit by the provisions of proposed section 75A. There is a risk of widespread but unwitting non-compliance.At the heart of the problem is the fact that themere linkage of transactions through conveyancing succession might trigger those provisions.
A number of examples of innocent transactions that might be caught by proposed section 75A have been canvassed with HMRC. In its briefing notes for the Committee, the Institute of Indirect Taxation set out the following case. In it, V owns a warehouse, which it sells to A for £250,000, the market value reflecting the hope that planning consent for redevelopment will be granted. However, consent is refused. As a result, A resells the building a year later to P for its then market value of £200,000. Proposed section 75A could bite in that situation because a series of transactions has taken place in relation to the property, ending in its purchase by P, and P could be liable for stamp duty on the higher original price of £250,000 rather than the price that he paid.
HMRC has indicated that proposed section 75A would not apply in that situation. However, the section requires that only one person, V, disposes of property, and that another person, P, acquires it, and that a number of transactions have taken place in connection with the disposal and acquisition of the property. The amount of SDLT payable in respect of those transactions is less than would have been due on a notional direct transfer between V and P. All those conditions would seem to be satisfied in the example given by the IIT, so P might be landed with an unexpected bill for extra stamp duty even though he had nothing to do with the earlier transaction. It seems that virtually all sub-sales could be caught in which A sells to B who then sells on immediately to C at a lower price.
Another example of the innocent transaction that might be at risk is one that I gave to the Chief Secretary—a long lease that is enfranchiseable when the right is exercised after the purchase of the lease. There is a sufficient connection even if the purchase takes place some years later, as there is no temporal restriction on the operation of proposed section 75A. There is a connection between the original purchase of the lease and the enfranchisement because if one had not purchased the original lease one would not be able to enfranchise. That has the potential to be caught by proposed section 75A. It is difficult to see how it could qualify as an artificial avoidance scheme of the sort supposedly targeted by the legislation.
Proposed section 75A does not require the direct disposal from P to V, nor does it require that V should have disposal to P in mind when entering the transaction chain. All that is required is that P should end up with the interest originally held by V, even if it arose because something else had happened in a series of other transactions. As the Law Society points out, wholly unrelated Vs and Ps could find themselves party to notional transactions and thus to the application of the provisions of section 75A. There is no requirement that the transactions should constitute an artificial scheme or that they should be motivated by a wish to avoid tax. The mere fact that transactions occur one after the other could turn them into a scheme under proposed section 75A. The danger is that wholly innocent transactions could be caught simply because they involve a series of steps.
The concern becomes even greater when one realises that those steps could take place over several years and still trigger the operation of proposed section 75A. The wide scope of the provisions is reinforced when one notes that proposed subsection (2) makes it clear that not all of the relevant transactions need to relate to land.
 I am told that HMRC asserts—this is in line with the response that the Chief Secretary made to the example that I put to him—that the words “involved in connection with”, contained in proposed subsection (1)(b), mean that the provisions will bite only where V and P are party to the same arrangement. However, that is not what the Bill says. The words “in connection with” give a very limited and uncertain protection to those carrying out day-to-day real estate transactions. Both the Institute of Indirect Taxation and the Stamp Taxes Practitioners Group have expressed serious concern about the lack of clarity surrounding the phrase on which HMRC seeks to rely to ensure that its legislation does not have an impact on innocent transactions.
Leaving aside the infelicitous nature of the term “involved in connection with”, considerable ambiguity is attached to the phrase. The question that is difficult to answer is how substantial a link is needed for HMRC to be able to show that proposed paragraph (b) is satisfied and the required connection is established between the transactions and the acquisition by P.
The words “in connection with” have been interpreted in different ways by the courts. Mr. Justice Nourse in Emery v. IRC thought that it meant a “definite causal link”. In Johnson and Johnson, Lord Justice Somerville thought it meant merely “having to do with”. In one of the more recent cases, in HMRC v. Barclays Bank, Lady Justice Arden took a wide interpretation of the term and also emphasised that it could mean different things in different contexts, and that it had to be read in context.
 The phrase “in connection with” provides an inadequate safeguard because it does not require the deliberate and consequential link between the transactions, which groups such as the Institute for Indirect Taxation believe is vital if proposed section 75A is not to hit a range of innocent transactions. The Stamp Taxes Practitioners Group points out that the term
“is seemingly capable of including... a merely causal or historic interpretation—without a time limit, motive connection or even knowledge of the other parts of the ‘scheme’.”
The inclusion of “involved in” seems to offer no effective additional protection.
We need something stronger than just the words “involved in connection with” to separate artificial avoidance schemes that should be restricted from normal, everyday transactions, which should not. That is why I tabled amendment No. 213. As well as introducing a purpose test, it would require amuch closer link between the transactions in issuethan is required by the original drafting of proposed section 75A. The purpose test that the amendment would introduce is similar to those that we have already discussed. They are not without their problems, but they have become a regular feature of our tax law. The Government propose to use purpose tests twice in the Bill in other contexts in relation to their targeted anti-avoidance rule on capital losses and in relation to sideways loss relief in schedule 4.
The amendment takes on board the discussion that we had in relation to capital losses and the TAAR rule, and proposes to cover not just those schemes motivated by a wish to avoid or reduce tax, but those aimed at securing or increasing a tax repayment. I am seeking to insert not only a requirement of a real connection between the different transactions, but an element of deliberation in carrying out a sequence of transactions. 
 The amendment would remove the risk that the mere fact of a number of transactions taking place sequentially in relation to the property would trigger the operation of proposed section 75A, even where such transactions were years apart and had nothing to do with stamp duty, stamp duty land tax, or a holding tax. The amendment would introduce a concept of a pre-ordained series of transactions that amount to a scheme or an arrangement. Both those ideas draw on case law. The concept of a pre-ordained series of transactions was considered in a line of cases running from Ramsey v. IRC and Furniss v. Dawson. It requires such a clear and well established link between the transactions that they are, in effect, a single composite transaction. That type of close link is missing in proposed section 75A.

Adam Afriyie: It occurs to me that if a scheme were designed to avoid stamp duty land tax and for whatever reason it fell apart halfway through, the individual who ended up buying the property but who had no connection whatever with the scheme would also be caught by the provisions.

Theresa Villiers: There is a risk that that might happen. I understand that there have been troubling examples of artificial avoidance schemes that have fallen outside the scope of proposed section 75A. Not only has it the potential to hit innocent transactions, but it is not effective in catching all the non-innocent ones.
The term “scheme or arrangement”, which is also utilised in the amendment, is familiar from case law. It echoes the wording used in a number of contexts in our tax law, such as sections 137, 139 and 140B of the Taxation of Capital Gains Act 1992.
 In the view of the IIT, introducing the term “scheme or arrangement”—a phrase that it describes as commonly used and well understood—creates the consequential link that is needed and remedies the problems that occur when reliance is placed solely on the “in connection with” test. Confining the operation of proposed section 75A to instances in which that type of scheme or arrangement is entered into with the main purpose of avoiding tax, rather than for a bona fide commercial reason, would be a much more effective way to tackle the avoidance that concerns HMRC without imposing collateral damage on a range of transactions that have nothing to do with avoiding tax, and, critically, without imposing significant uncertainty and cost on those buying and selling property. The general approach taken in the amendment is broadly in line with representationsmade by the Institute of Indirect Taxation, the Law Society, the CIOT and the Stamp Taxes Practitioners Group.
Amendment No. 214 would also help to deal with the problems that I have outlined, in particular the issues connected with the absence of any time limit for the operation of the provision. It would provide that transactions taking place more than three years before the acquisition by P should be disregarded for the purposes of proposed section 75A. That would put a temporal limit on the scope of the operation of proposed subsection (1) which would significantly clarify the legislation, otherwise HMRC could in theory look back many years at transactions that happen to have been carried out in relation to a particular item of property. Like amendment No. 213, it would answer the very serious concerns raised by the representative groups to which I have referred.
In responding to calls for the scope of proposed section 75A to be tightened and for a motive test to be inserted, HMRC have responded that that is not necessary because uncertainties can be ironed out using the code of practice 10 clearance procedure. It is welcome that HMRC has indicated that access to the procedure will be extended indefinitely instead of being restricted to the early years of new legislation, as would normally be the case.
However, access to the procedure does not provide all the answers to the problems that I have outlined. For a start, it does not amount to the full clearance procedure for which organisations such as the CIOT and the IIT have called. The Law Society points out that if the Government want to introduce a mini-general anti-avoidance rule for SDLT in proposed section 75A, they need to have HMRC officials able and willing to provide the necessary clearances within a commercially acceptable timetable. An adjudicator under the COP10 procedure can give guidance only on what transactions are caught by proposed section 75A. He cannot disapply it to a transaction—even a wholly innocent one—if the law says that it applies.
The Law Society put the position best in relation to the limitations of the COP10 procedure. It said that
“HMRC will have to take a view as to the “innocence” or otherwise of a transaction in deciding whether the legislation should apply. COP10 rulings are not given on what the legislation intends to hit; they are an interpretative provision, where a matter of tax law is unclear, allowing the taxpayer to receive clarity as to how the legislation, as it is laid down, should be applied to a particular set of facts. Our experience is that the complex transactions unit takes a very legalistic view towards legislation, and we have no doubt that transactions which are innocent will get negative COP10 rulings because on the face of the legislation, it applies to them when it was never intended to.”
The Law Society went on to highlight a further problem with the procedure by saying:
“Taxpayers are reliant on HMRC’s executive view as to what is an ‘innocent’ transaction such that two taxpayers in very similar circumstances could be taxed differently at the whim of the HMRC officer to whom a COP10 clearance request is made.”
Moreover, application for such rulings takes time and generates costs, which is a problem. I have received representations about transactions that fell through because it was impossible to get a COP10 ruling quickly enough. Switching from the idea of precise and targeted legislation to a system more similar to US-style rulings has constitutional implications that should be properly debated. The implications for HMRC resources also have to be considered in light of the need for the prompt turnaround of applications.
Another argument put forward by HMRC, which echoes some of the points made by the Chief Secretary, is that we do not need to amend proposed section 75A because interpretive problems can be resolved using guidance. To that end, it has published a so-called white list of transactions that it does not believe should be covered by proposed section 75A. I am not keenon that phrase; I prefer cleared list. However, leaving aside what one should call it, its publication does not solve the problems with proposed section 75A. The Stamp Taxes Practitioners Group points out, with justification, that the white list approach is not an effective substitute for significant revision of the legislation. It identifies particular problems with the white list approach in this context because of the fact that the proposed section needs to be considered in relation to virtually all conveyancing transactions. Relying on non-statutory guidance is difficult enough in narrow specialist areas such as group relief and real estate investment trusts. However, it is much more difficult in relation to legislation that might have an impact on all conveyances and home purchases.
Many solicitors do not have in-house expertise or research staff who can regularly monitor HMRC’s website for guidance. Certainly, an average high-street solicitor is highly unlikely to have access to such resources or expertise. It will also be very difficult to come up with anything like a comprehensive white list. There are even more fundamental constitutional concerns at issue, however.
Richard Stratton, chairman of the Law Society’s tax law committee, wrote to the Paymaster General in March referring to the principles articulated by the House of Lords in R v. HMRC ex parte Wilkinson. He pointed out that
“however willing HMRC is to confirm that a transaction was not caught, Wilkinson makes it clear that a tax collecting authority cannot ignore legislation and cannot have significant discretion in tax collection.”
As Lord Upjohn once famously commented:
“A taxpayer should be taxed by law not untaxed by concession”,
and as the IIT rightly points out:
“HMRC guidance is no substitute for introducing a fair law.”
 The Stamp Taxes Practitioners Group has called for a non-exhaustive white list to be inserted into the legislation to give certainty to practitioners and reassurance about how to comply with the law. I welcome proposed section 75C(10), which allows the Treasury to do that and to disapply proposed section 75A in certain cases. However, as the CIOT has commented, that
“does not obviate the need for proper drafting of primary legislation.”
Amendment No. 234 seeks to amend paragraph (c) of proposed section 75A(1). That would deal with a problem that has been raised in a number of representations, which is that, as the clause is drafted, there is no need for the three paragraphs in proposed subsection (1) to be read in conjunction with one another. The amendment would clearly tie together proposed paragraphs (a) and (c) and ensure that they are read together rather than separately. Without that change, there would be an ambiguity about the chargeable interest to which the word “its” in the last line of proposed paragraph (c) refers. The amendment would ensure that the interest referred to in proposed paragraph (c) is that which is transferred to P and not the whole of V’s original interest.
The concern is about the situation in which V transfers only part of his interest. For example, if A agreed to sell land to B for £3 million and then B agreed to sell, via a sub-sale, one third of the land to three purchasers, C, D and E, for £1 million each, there is a danger, as the section is currently drafted, that proposed section 75A could operate to impose an SDLT charge on each of the three purchasers for the full £3 million rather than the £1 million that each of them actually paid.
 On amendments Nos. 235 to 237, the CIOT views proposed section 75A(5) as being too wide. The Stamp Taxes Practitioners Group feels that it should be more focused so that it catches only the chargeable consideration that would have been payable for the land but forthe insertion of the phrase “scheme transactions”. It would be useful if the Minister could confirm thatno double counting will be allowed under proposed subsection (5)—in other words, that it should not be permissible to add up receipts and payments by the same party to arrive at the figure for the notional consideration.
Amendments Nos. 235 to 237 are aimed at reducing the risk of double counting. Subsection (5) refers to
“the largest amount (or aggregate amount)”.
 That does not give rise to a problem so long as “or” is interpreted in the normal way; in other words, disjunctively, so that the tax is payable on either the largest amount or the aggregate amount. However in some legal contexts “or” has been interpreted conjunctively to mean “and”.
 My three amendments would help to remove the problem by moving the reference to the amount to match the relevant paragraphs. The term “largest amount” seems focused on paragraph (a) whereas the only relevant context for the application of “the aggregate amount” is the situation set out in paragraph (b). The amendments make it plain that either (a) or (b) applies and not both.
Amendment No. 238 is a simple amendment to resolve the problem that I drew to the Chief Secretary’s attention. It makes it clear that exercising a statutory right of enfranchisement, extension or enlargement of a leasehold interest cannot trigger the operation of proposed section 75A. Without this change, there is a real danger that someone who buys a lease and later exercises a statutory right to extend it could be hit by proposed section 75A.
Turning to amendment No. 239 and section 75C, the Law Society expresses the concern that the statutory carve-out for reliefs in subsection (2) of proposed section 75C will be restrictively applied. The question here is whether the reliefs and disregards that would be available in relation to the actual transaction will still be available in relation to the notional one. A key problem here is that subsection (2) applies only to reliefs.
Many important SDLT rules that reduce the liability of the taxpayer are not reliefs in a technical sense. They are simply computational rules, exemptions or disregards. If they cannot be applied to the notional transaction under proposed section 75A, this will involve a significant increase in the SDLT bill faced by taxpayers. It would turn section 75A from an anti-avoidance provision into a simple tax increase.
The Stamp Taxes Practitioners Group is also concerned that there is no clear mechanism provided for crediting SDLT that has been paid in relation to transactions earlier in the chain against the SDLT charged on the notional transaction. Considerable uncertainty surrounds this point and any clarification that the Chief Secretary could give would provide significant reassurance to people who are potentially affected by these provisions.
Amendment No. 239 to subsection (4) of proposed section 75C would deal with the specific problem of group relief. It is a concern that the SDLT group relief rules have been excluded from the list carried over into section 75C and thus available to relieve liability under proposed section 75A. Group relief plays an important function in this context and its loss would disrupt many significant commercial transactions. Again, unless this problem is dealt with, section 75A looks much more like a straight tax increase than an anti-avoidance provision. If the Chief Secretary will not accept the amendment, I hope he will at least explain why group relief provisions on SDLT contained in part 1 of schedule 7 of the Finance Act 2003 should not apply to notional transactions under section 75A.
Before concluding, I would like to flag up two general concerns about proposed section 75A. As I said to the Chief Secretary, there could be a number of instances where there could be more than one transaction in the same case that could fall within the definition of a notional transaction for the purposes of these provisions. It is not clear how section 75A is supposed to operate in this situation. It does not surprise me that the Chief Secretary was unable to give me an answer on that point. I should be delighted to take him up on his invitation to address the query to HMRC, but it is a concern that we do not have a clear answer on that yet. In particular, how will a decision be made as to which transaction to select as the notional one?
 Another concern is that it might not always be possible to ascertain who is P for the purposes of new section 75A(1). In a recent article for Taxation Magazine, Jeremy de Souza, a lawyer for Blake Lapthorn Tarlo Lyons, pointed out that in many cases there may be a number of potential Ps in the conveyancing chain. He concluded by stating of these provisions that
“warning flags should be flying over many property transactions from now on.”
In conclusion, new section 75A as drafted is simply too wide-ranging. It will have to be considered in virtually all conveyancing transactions. Thousands of high street legal and conveyancing practices across the country will have to grapple with these highly complex provisions. It is highly likely that many will be unaware of the application of the new section and hence of the need to make an SDLT return. Even if they are aware of the rules, it may be difficult in practice to get holdof the information needed to ascertain whetherlinked transactions have occurred, sufficient to trigger section 75A. This provision could add a significant conveyancing headache for thousands who just want to buy a new home. I hope that the Chief Secretary will reassure me that those fears are unfounded.
 It is particularly harsh to impose complex, unclear and hard-to-understand tax provisions in a self-assessment system, where taxpayers themselves have to determine whether the provisions apply. One expert told me that these rules could leave transactions open to re-examination by Her Majesty’s Revenue and Customs, potentially backdating 21 years. The provisions are so unclear and uncertain that it will be difficult for HMRC to apply them consistently. The upshot is that significant extra costs will be imposed on the property market and on home buyers.
To return to Richard Stratton’s letter to the Paymaster General on behalf of the Law Society, he wrote that
“uncertainty engenders costs, whether this is due to lenders increasing the cost of borrowing ... or delay pending seeking clarification from HMRC either informally or under Code of Practice 10 procedure.”
The Stamp Tax Practitioners Group said:
“This uncertainty is causing delays in major commercial—and indeed some everyday—transactions because, although clients acquiring high value properties are willing to take risks based on a professional analysis, the banks and institutions that are providing finance for such transactions are generally not. STPG members have reported experience, in relation to transactions in the pipeline at the time when the Regulations were introduced, of funding offers either being withdrawn or the funders being prepared to proceed only on the basis of increased interest rates.”
 The Chancellor has significantly increased the burden of stamp duty during his term of office at No. 11. Only a few weeks ago, we had the home information packs disaster, and I urge the Chief Secretary to think again before he imposes further costs and uncertainties on the property market, as a result of legislation which, I believe, contains some serious defects.

Stephen Timms: I hope that I can persuade the hon. Lady that her amendments are unnecessary. We have seen the text of them before, because they have been suggested by some of those involved in the property sector. As she knows, we have accepted quite a number of her proposals—they were in the Government amendments that we discussed a few minutes ago. We have rejected this particular group for good reason. Some of the amendments would reopen the avoidance opportunities that the clause is designed to shut down.
Understandably, the hon. Lady spent most time discussing amendment No. 213, which would, as she said, replace the clause’s objective test with a different set of tests. First, there would have to be a “pre-ordained series of transactions”. The problem is that it is often easy for the parties to arrange things so that the steps are not “pre-ordained” because they might or might not happen, so it is quite easy to avoid that test. A test of purpose is difficult to apply to a transaction tax such as stamp duty land tax, because the main purpose of the transaction is likely to be the commercial one of transferring economic ownership of the property from vendor to purchaser, so I do not think that the approach in this amendment works. It would not give greater certainty to those not engaged in tax avoidance either.
In most cases where a transaction is financed by borrowing, the lender is most concerned to have certainty about the tax consequences, but it is unlikely that lenders could satisfy themselves as to the purposes of the parties to the transaction. The answer, therefore, is that certainty can be secured through clear guidance from HMRC, both generally and in relation to specific transactions. As I have said, there is a firm commitment to giving that guidance.
I also hope that members of the Committee will be reassured to note that the Government have already responded constructively to representations made both during the original drafting of the Bill and in relation to the Government amendments that we discussed this morning, and we will continue to listen carefully to representations in the future. If it still proves to be the case that transactions that are not tax avoidance transactions are likely to be caught, we can and will help innocent taxpayers who are inadvertently caught. We can do that by using the power that the hon. Member for Chipping Barnet referred to, in new section 75C(10), which can disapply the application of new section 75A in specific circumstances.

Theresa Villiers: Is HMRC contemplating using new section 75C(10) on an individual basis for individual taxpayers? It seems most peculiar to draft wide-ranging legislation and then implement secondary legislation to exempt specific individuals.

Stephen Timms: I refer the hon. Lady to what new section 75C(10) says:
“The Treasury may by order provide for section 75A not to apply in specified circumstances.”
 I do not think that it would be usual for the “specified circumstances” to apply to just one individual transaction, but the wording does not make that impossible.
 Amendment No. 214 would assist those avoiding payment of stamp duty land tax by restricting the application of clause 70. It would disregard transactions occurring more than three years before the ultimate acquisition of the property by the purchaser. The intention there is understandable, but there is no reason why purchasers should have to make the inquiries that the amendment would spare them. As long as they are planning to pay stamp duty land tax on their purchase in the normal way or they qualify for a relief such as charities relief, the anti-avoidance provisions in the clause will not apply to them. Incidentally, the hon. Member for Chipping Barnet queried whether charities relief and reconstruction relief would be affected. Those reliefs are expressly preserved and are not affected.

Theresa Villiers: I am grateful to the Chief Secretary for his clarification, which I accept entirely and very much welcome. I would like to ask him about the three-year time limit in amendment No. 214. His answer to my concern about enfranchisement of the leasehold interest was that there had to be sufficient connection between the transactions so that they happened very close together. He therefore seems to envisage that new section 75A should apply only when transactions are relatively close together. If that is the case, why does he not accept the amendment, have the three-year cap and reassure people who are very worried about this legislation?

Stephen Timms: Because it is not needed. As I have said, as long as the parties involved are planning to pay stamp duty land tax in the normal way on their purchase or they qualify for a relief, they will not be affected. It is only where their involvement results in a reduction of the tax that would normally be payable that the clause will be likely to affect them.

Theresa Villiers: The issue is that people may not know that transactions way back in history are affecting their SDLT liability, so they may be planning to pay the SDLT that they think is due—I am sure that they would be. The concern is that, if HMRC can look back on a string of transactions in previous years, the party concerned will simply not know that that affects their current liability.

Stephen Timms: It may be of some reassurance to the Committee to know that transactions that occurred before 6 December 2006, when the regulations that preceded this clause were laid, would be disregarded in any event, and a provision such as that set out in the amendment would not have any effect until 2009 at the earliest. I do not think that there is a problem that needs to be fixed here.
I understand the purpose of amendment No. 234, but, again, I think it is unnecessary, because it is clear from the context that the interest referred to in subsection (4)(b) is the same as the interest disposed of by V in subsection (1)(a). Amendments Nos. 235, 236 and 237 do not add anything, and would in fact reduce the effectiveness of the anti-avoidance provisions by changing the circumstances in which the section could be applied. They would lead to the clause not being applied fully in circumstances where any one person gave consideration in the form of more than one transaction, and that would allow tax to be avoided by breaking the consideration into a series of transactions, only the largest amount of which would be liable to stamp duty land tax—which is precisely what we want to prevent.
Amendment No. 238 would mean that newsection 75A would not apply to the exercise of a statutory right of enfranchisement—the point raised with me by the hon. Lady earlier on. That would create an opportunity for avoidance, however, because it is not possible to rule out the exercise of such a right as a step in new types of avoidance schemes. I want to reassure those involved in legitimate transactions that, in most cases, the exercise of such a right would not be one of a number of transactions involved in connection with a disposal and acquisition, so it would not be affected by new section 75A.

Rob Marris: I may have misunderstood, but would not much of the discussion be academic, as stamp duty land tax would never be payable anyway? If we talk about leasehold enfranchisement for many houses in the west midlands, for example, we may note that they were sold originally on a 99-year lease, and the usual multiple was 11 times the annual ground rent, which as I understand it would not get anywhere near stamp duty land tax. I am not saying that no transactions would be caught, but many of the average transactions of our constituents, using the Leasehold ReformAct 1967, would not be caught at all anyway, as they are below the stamp duty land tax threshold.

Stephen Timms: My hon. Friend is absolutely right, and the increases that we have made in the stamp duty land tax threshold have helped in this context.

Theresa Villiers: The problem is that the enfranchisement cost is unlikely to be above the SDLT threshold in many cases, but if new section 75A bites, the cost of the original lease would have to be taken into account, which could well take the combined cost above the threshold, so it is relevant even where the enfranchisement cost is below the threshold.

Stephen Timms: Finally, amendment No. 239 would exclude from the application of new section 75A any consideration paid under a transaction that qualified for group relief. We have, I am afraid, seen a number of avoidance schemes in the past that made use of group relief as part of a series of transactions, so I would not at this stage want to exclude considerations paid under a transaction that qualifies for group relief. Again, I can reassure the Committee that if there are specific categories of legitimate transactions involving group relief where it is appropriate to disapply newsection 75A, we would be prepared to consider exercising our powers under new section 75C(10). I hope that that is helpful to the hon. Lady.
My concern is that the Opposition amendments would allow, inadvertently I am sure, some of the very schemes that the clause aims to end, to carry on unchecked. Therefore, I hope that the Committee will not accept them.
I will pick up one or two further points made by the hon. Lady. The schemes that this clause is designed to prevent are wholly artificial, and those using them must expect that we will act to prevent their use, as they pose a significant threat to Exchequer revenue. For example, before the pre-Budget Report, Revenue and Customs was aware of two transactions using these schemes, which alone were worth a combined total of£850 million. We had no option other than to act as quickly as we could to counter those schemes, hence the laying of the regulations at the time, and the clause.
The hon. Lady suggested that, if those involved in the transaction did not intend to save any stamp duty land tax through the transaction, the provision should not be applied. However, it is often difficult to establish what the motivation in any transaction was, and there is a real danger of leaving a gate wide open to those wishing to avoid tax.
The hon. Lady was concerned that mere linkage through conveyancing succession would be caught by proposed new section 75A. I assure her that that will not be the case. There must be more connection than mere succession, as is implied by the phrase “involved in connection with” in proposed new section 75A that she referred to. The acquisition involvement means more than mere temporal succession. When drafting the measure, we looked at the phrase “involved in connection with”. Our legal advice was that the terms are not too vague, as she suggested, and that they will not create any difficulties of interpretation. In any case, as I have said, we will be issuing guidance to ensure that the meaning and intent of the legislation are clear. 
The hon. Lady made the point that code of practice 10 rulings cannot disapply legislation. Of course that is true, but a code of practice 10 application might result in the Government exercising their disapplication power under proposed new section 75C(10), potentially with retrospective application. She was concerned about the speed of those rulings. HMRC aims to turn them around within 28 days.

Adam Afriyie: I thank the Chief Secretary for his generosity in giving way. Will he make it absolutely clear why there is no exemption for long-term leaseholders who may choose to enfranchise and buy the freehold, in cases in which that purchase exceeds the limit? Why is that not very clearly spelled out somewhere? I sensed a slight hesitancy in his response, even to the hon. Member for Wolverhampton, South-West.

Stephen Timms: I accept that there are some good intentions behind these amendments, and no doubt behind others, but in drafting the legislation we must avoid opening a new opportunity, or leaving open an opportunity, for avoidance because, sadly, there will be plenty of people piling in to take advantage of such openings if they are provided. That certainly applies to a number of the amendments tabled by Opposition Members, and one can envisage other blanket exclusions that could have the same effect. That is why we are being very cautious about the wording we have adopted.
The hon. Lady was concerned about double counting under proposed new section 75A(5). Subsection (5) will add up the amount paid by any one person or received by the vendor. It is aimed at identifying the true purchase price, which might be artificially split up, and ensuring that the full amount of tax is payable. She was also concerned that there was no clear mechanism to credit to the notional transaction stamp duty land tax paid earlier in the chain. Proposed new section 75C(9) contains precisely such a mechanism, so that issue is addressed.
Finally, in contrast with the concerns expressed by Opposition Members, let me refer to some of the comments made when the regulations that precede the clause, which I think have worked well, were made. Sue Taylor, head of real estate tax at Eversheds, said that this
“will catch most of the planning in current use....It is a serious bit of legislation”.
Craig Leslie, head of stamp taxes at PricewaterhouseCoopers said:
“HMRC are making very good use of all the planning information they receive”.
Patrick Cannon, a leading barrister in the area, said that
“this is a well aimed measure”,
as indeed it is. I hope, on that basis, that the Committee will support my amendments, but not accept those tabled by Opposition Members.

Theresa Villiers: The Chief Secretary may believe that the provision is designed to target a few wholly artificial schemes, but the reality is that the Government have not succeeded in focusing in on that target, and they are going to hit other innocent transactions as well.
I am grateful to the Chief Secretary for confirming on the record that mere linkage through conveyancing succession does not satisfy proposed new section 75A. That is very welcome. I am not sure whether it is consistent with what the statute states, but at least we have it on the record for the purposes of interpretation by the courts.
I continue to be concerned by the approach that the Chief Secretary seems to have confirmed today, which is that the intention is to create a broadly worded provision that can, if necessary, be disapplied in certain circumstances if it operates in an unintended way and applies to innocent transactions. That raises some constitutional concerns about the legislation.
I am also grateful for the Chief Secretary’s reassurance on the operation of proposed newsection 75C(9) and credit for earlier stamp duty land tax paid. Given that relevant transactions can also include share transactions, it would be useful to clarify whether previous tax paid in relation to stamp duty on shares can also be taken into account, but proposed new section 75C(9) provides useful reassurance on the point that I made.
I have listened to the Chief Secretary’s concerns about the purpose test that I have proposed. I will not press that issue to a vote because I wish to reflect further on the appropriate wording and approach of that measure in the light of what he said. There is no excuse, however, for turning down the three-year restriction proposed in amendment No. 214. I would like to press that amendment to the vote.

Amendment proposed: No. 214, in clause 70, page 44, line 13, at end insert—
‘(1A) Transactions taking place more than three years before the acquisition of a property by P shall be disregarded for the purposes of subsection (1).’.—[Mrs. Villiers.]

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 15.

Question accordingly negatived.

Amendments made: No. 184, in clause 70, page 45, line 20, leave out ‘(but subject to subsection (2))’.
No. 185, in clause 70, page 45, line 29, at end insert—
‘(3A) In subsection (3)—
(a) paragraph (a) is subject to subsection (2)(a) to (c),
(b) paragraph (b) is subject to subsection (2)(a) and (c), and
(c) paragraph (c) is subject to subsection (2)(a) to (c).’.
No. 186, in clause 70, page 45, line 31, at end insert—
‘(5) In this section a reference to the transfer of a chargeable interest from V to P includes a reference to a disposal by V of an interest acquired by P.’.
No. 187, in clause 70, page 46, line 2, at end insert—
‘(4A) In the application of section 75A(5) an amount given or received partly in respect of the chargeable interest acquired byP and partly in respect of another chargeable interest shall be subjected to just and reasonable apportionment.’.
No. 188, in clause 70, page 46, line 7, after first ‘a’ insert ‘property-investment’.
No. 189, in clause 70, page 46, line 7, after ‘partnership’ insert
‘(within the meaning of paragraph 14 of Schedule 15)’.
No. 190, in clause 70, page 46, line 21, at end insert
‘and may make provision with retrospective effect.”’.
No. 191, in clause 70, page 46, line 25, after ‘But’ insert—
‘(a) ’.
No. 192, in clause 70, page 46, line 28, at end insert—
‘, and
 (b) a provision of new section 75C (inserted by subsection (1) above) shall not have effect where the disposal mentioned in new section 75A(1)(a) took place before the day on which this Act is passed, if or in so far as the provision would make a person liable for a higher amount of tax than would have been charged in accordance with those regulations.’.—[Mr. Timms.]

Question put and agreed to.

Clause 70, as amended, ordered to stand part ofthe Bill.

Clause 71

Partnerships

Stephen Timms: I beg to move amendment No. 106,in clause 71, page 47, line 9, leave out ‘sub-paragraph (1)(b),’ and insert ‘sub-paragraphs (1)(b) and (4),’.

Roger Gale: With this it will be convenient to discuss Government amendment No. 107.

Stephen Timms: As I indicated earlier, clause 71 amends the Finance Act 2003 to counter known schemes that attempt to avoid stamp duty land tax by moving property tax-free into a partnership—that is, by the ceding of partnerships. The clause will prevent tax avoidance schemes that we initially dealt with by regulations in the pre-Budget report 2006. The two amendments that I am tabling are directly in response to representations from the property sector.
 The first amendment is merely to rectify an omission from the clause; it is a minor omission, but if it was not rectified we would run the risk of confusing those trying to interpret the law. The second amendment follows some late representations suggesting that the clause could have an adverse effect on investment structures that use partnerships but are not engaged in avoidance. We have been lobbied to include a transitional provision, so that the provisions that will create the change do not apply where all the property in a partnership was acquired before Royal Assent and stamp duty land tax was paid in full on the gross market value of the property, and that is what the amendment does.
We have taken on all the suggestions we could that will facilitate those involved in legitimate, innocent transactions without creating further opportunity for those seeking to avoid tax. Of course, those developing avoidance schemes will keep on looking for new ways to avoid stamp duty land tax and we will respond by closing avoidance schemes quickly. We have a duty to the majority of taxpayers to maintain a level playing field for everybody, and of course we will keep this area under review.
I commend the amendments to the Committee.

Theresa Villiers: I would like to address some of the issues surrounding the clause at the same time as addressing the amendments, to obviate the need for a separate clause stand part debate.
I appreciate that there are avoidance risks in relation to partnerships, which have not always proved easy to tackle in the past. However, there seems to me a significant risk that clause 71, like the clause that we have just discussed, could have some unintended consequences in relation to innocent transactions.
 Again, some general concerns about the operation of the clause have been expressed to me by the Institute of Indirect Taxation. It believes that transactions that a taxpayer might contemplate without professional advice, such as gifts, could be affected by clause 71. It states:
“We are surprised that a Labour Government should take the view that a family that cannot afford professional advice should not expect to be able to make straightforward gifts without triggering tax consequences.”
I would like to raise two points in relation to the scope of clause 71, and I do not think that they are addressed by the Government amendments. One of them is partially addressed, but some remain and it would be excellent if the Chief Secretary could help to answer them.
The first issue concerns the deletion of the requirement of consideration. Under the old law, the relevant partnership anti-avoidance provisions did not bite on gifts, so they did not apply to a transaction where no consideration was given. The Law Society has expressed concern about the removal of the requirement of consideration by clause 71, pointing out that the consequence is that a gift of a partnership interest from individual to individual is now subject to a market value charge based on the value owned by the partnership. It should also be noted that that is a charge on the gross value of the land owned by the partnership rather than the real value of the gift, which could be considerably less where the partnership has borrowed to invest in the land. So the SDLT charge here could be quite a high one. The Law Society expressed concern that a gift of a partnership interest attracts a charge when a gift of the underlying property would not. It would be useful if the Minister could provide greater clarification on that point and explain the reasons behind the proposed deletion of the consideration requirement.
The second point is rather more worrying. It concerns one of the effects that are partially caused by the deletion of the requirement of consideration, but it also interacts with other changes made in clause 71, and it involves property investment partnerships. The point is best explained by looking at the example given by the Law Society in its briefing to the Committee. It concerns a relatively simple case, where A, B and C are in partnership, sharing income and profits equally, with partnership property of £450,000. Each partner is deemed to own £150,000-worth of property. Further property is purchased by the partnership, using its assets. If another person then joins as a new partner, providing £150,000 in cash, the value of everyone’s interest will have stayed the same, at £150,000. I am told that before section 75A, it was accepted that the addition of a new partner did not trigger an SDLT charge.
 The amendments to paragraphs 14(1)(b) and 36 contained in clause 71 would throw that into doubt. Will the Minister confirm whether the enactment of clause 71 will result in SDLT being payable in that situation? It seems that it would be. If so, it could have a significant impact on property investment partnerships.
 The practice of second closing—bringing a second wave of investors into a partnership some months after it is first set up—is common. The changes proposed in clause 71 would result in SDLT being payable if the partnership had acquired land between the first and second closing, even though it was bought with money put up by the original investors. If second closings are now to trigger an SDLT charge, it could severely restrict the use of open-ended property investment partnerships. Similar problems occur when partners redeem their partnership interests. Coupled with a further concern, such problems could render partnerships almost unusable in the property investment field. I hope that I am wrong, and that the Chief Secretary will reassure me.
 My other concern is about changes in the profit sharing ratio in a partnership. The old law made it plain that, if a partner sold his interest for a consideration to another person, it would give rise to an SDLT liability. However, clause 71 would significantly expand the scope of SDLT by applying it not only in that situation but whenever the profit sharing ratio in a partnership changed.
 That could give rise to significant problems, as profit sharing ratios can change automatically under the original partnership agreement. A common example might be an agreement that entitled the operator of a partnership to an increased profit share if the partnership reached a particular level of return. When that relevant level of profits was reached, the partnership shares would change. Under the old paragraph 36, there was no SDLT problem because no consideration had been given to changes in profit shares, and a partnership interest, as it was previously understood, had not been transferred. It now seems that SDLT will have to be paid in every case when a profit sharing ratio changes, even if it was provided for in the original partnership agreement, because of the new definition of what amounts to an interest in a partnership and the removal of the need for consideration.
Similarly, development funds using partnerships will typically include a provision to call for more money from investors: it is a well-known fact that developments frequently run over budget. Such calls are not compulsory; some investors may take them up and others not. However, in such cases, we again see that changes in the partnership ratios that to date would not have triggered an SDLT would now do so. Again, the Minister’s guidance on whether that is the case would be useful. The same problem occurs where an investor defaults or goes bankrupt—another occupational hazard in the property development business. Until now, the resulting change in partnership ratios did not trigger SDLT. It now seems that it would.
I have received representations that, if my analysis is correct and SDLT is payable, partnerships will no longer be used for property funds. That is significant, as such partnerships have played an important role in property investment. A solicitor who contacted one of my colleagues about the problem described the change as lunacy, although I would not go that far. I am willing to hear the Chief Secretary’s justification, but I want to know whether that effect was intended by the Government when drafting clause 71. If so, what was their justification for making such a significant change? 
What avoidance problem was caused by property investment partnerships that justified penalising them in the way that clause 71 seems to do? What assessments have the Government carried out on the impact that the change will have on the property investment market? I would be interested to hear whether the Chief Secretary is prepared to publish the Department’s research on the impact of the change. To what extent will the amendments assist in solving the problem? They are helpful in some contexts. In particular, they help to tackle the unfairness that the change in the law creates for people who are committed to partnerships on the basis of the existing law. However, they seem to cover only partnershipsthat bought land between December 2003, when the SDLT regime was introduced, and commencement of clause 71.
While it is useful to give assistance in relation to those transactions, the Government amendments provide a very limited lifeline. In particular, they do not seem to solve any of the problems in relation to partnerships that want to carry on business in future, nor do they permit new partnerships to set up start-up arrangements in the property investment businesses. As the Chief Secretary has confirmed, they are merely transitional arrangements to ease the change that is being introduced.
A way should be found to address concerns about avoidance in this area without such radical restrictions on the use of property investment partnerships. In the debate on REITs, the Government have repeatedly stated that they wish to encourage collective investment in property. If that is the case, why are they effectively shutting down an important vehicle for doing so—the property investment partnership? The Committee should consider the likely consequences of that shutting down. The onshore alternative structures that might substitute for property investment partnerships are limited. Not all enterprises are suited to REIT status; as we debated at length in this Committee last year, REITs are usable only in certain circumstances. In particular, many property enterprises may not be large enough to justify the cost of the listing that is required for REIT status. I am concerned lest the net result of the changes is simply a shift of property investment into offshore unit trusts. I cannot believe that that is really what the Government want.
The Chief Secretary referred to Patrick Cannon’s comments on section 75A. I, too, would like to draw to the Committee’s attention to some comments by Mr. Cannon, who is a barrister. They appeared in Property Week a few days ago in an article helpfully entitled, “Latest tax clampdown is shoddy and rushed”. Let me close with a quote from the article, which states:
“The SDLT partnership provisions are an unfortunate example of just how bad tax legislation can get when you have layer on layer of anti-avoidance amendments built on to basic provisions. The provisions seem to have been worked on at different times by different draftsmen, some of whom do not seem to have a full grasp of how property partnerships function.”
I have to say, Mr. Chairman, that I am inclined to agree.

Roger Gale: Before we progress, the hon. Lady has, perfectly reasonably, broadened this into a stand part debate. As the Committee knows, I have no problem with that so long as we do not try to cover the ground twice. However, I listened fairly attentively to what she has been saying and it strikes me that she might have placed the Chief Secretary in a slightly difficult position, because she has commented on one or two things that would otherwise have been raised under the next pair of amendments. If the Chief Secretary wishes to respond now, he might find it necessary to curtail his remarks on the next pair of amendments.

Rob Marris: I had anticipated that you might turn this into a broader debate, Mr. Gale. The hon. Lady has got me totally confused—perhaps my right hon. Friend can help me. I had thought that stamp duty land tax bit on land, but the hon. Lady has talked about changing profit shares in a partnership. I did not think that stamp duty land tax had anything to do with that, so I should appreciate some clarification.

Theresa Villiers: That would be the impact of clause 31. If a partnership holds land and one of the situations that I have outlined, such as a new partner joining, occurs it will be subject to an SDLT charge on that land. That is the connection between the land and a partnership.

Rob Marris: I understood that part of the argument. I am not sure that I agreed with it, but I understood it. However, I did not understand at all what the hon. Lady said about changing profit share. I hope that my right hon. Friend can clarify that.
The second point that I should like to make to my right hon. Friend is that it is often, understandably, prayed in aid in this Committee that the Chartered Institute of Taxation says at paragraph 29.1 of its submission that the proposed changes to the Finance Act 2003, schedule 15, are welcome in that they eliminate some of the anomalies in schedule 15. That is all that it says.

Philip Dunne: I welcome the remarks that the Chief Secretary made in introducing the amendments, which attempt to establish some clarity for partnerships that would be caught incidentally. In other words, they would remove genuine partnership transactions that are not seeking to avoid stamp duty land tax, which is clearly the thrust of the schedule and clauses. However, I am not sure that he has done his job as well as the Committee would normally expect him to do. I am concerned that there are incidental consequences for members of existing partnerships that go beyond the special purpose vehicle type of partnerships that he seeks to catch.
I would appreciate it if he could give the Committee some clarity here and confirm that the Government amendments do not apply to those partnerships where property interests are held incidentally to the activity of the partnership rather than specifically, and interests in those partnerships change over time. My hon. Friend the Member for Chipping Barnet, in her thoughtful contribution, showed that by changing the definition of consideration in the Bill, a partnership gift interest from one individual to another, such as a gift from a partner to his spouse, his children or a family interest, could potentially trigger a stamp duty land tax charge if the partnership happens to hold property. That is quite clearly not the intent of the clause.
I am not sure that the Government amendment is sufficiently clear. We do not have a definition of a property investment partnership although it may exist in the Finance Act 2003. I apologise to the Chief Secretary for not having seen such a definition if it does exist. Perhaps he could put us straight on that. The second point on which I seek some clarity is whether it is intended to catch gifts in the manner that I have just described if they arise in partnership interests. If a property is held outside a partnership, such a gift would not attract stamp duty land tax whereas if it is held within a partnership it would. Is that the Government’s intention? If so, I think that it is quite inappropriate.

Stephen Timms: As I have indicated already, the clause aims to prevent tax avoidance schemes that were initially dealt with by regulations at the pre-Budget report. As with the previous clause, the regulations were time-limited and so now need to be replaced using the Finance Act. But the opportunity we have had to revise the legislation has been helpful. Not only has it allowed us to make changes to ensure that a variation on the schemes that we did not know about when we drafted the regulations can be dealt with, it has allowed us to consider whether there are any changes we can make to ensure that legitimate transactions are not affected by the legislation.
As far as the clause itself is concerned, I believe that we have been able to reassure most in the property sector that it will be clear, proportionate and effective. My hon. Friend the Member for Wolverhampton, South-West is right to draw attention to the views of the Chartered Institute of Taxation, which were communicated to all members of the Committee. It welcomed the amendments and the clause. The clause brings fairness to the property sector for taxation by ensuring that transactions using these complex avoidance schemes will be taxed in the same way as they would have been if they had been straightforward land transactions between two parties.
 I should again point out that significant sums are at stake here. Until the PBR, when we made the regulations, only relatively few transactions had used these schemes, but the loss in stamp duty land tax yield is significant. These are major commercial transactions. The number would have certainly continued to rise. Closing this scheme alone will bring extra combined revenue for the years 2006-07 to 2009-10 respectively of £10 million, £25 million, £25 million and £25 million.
We believe that we have taken on all the suggestions we could that will facilitate those involved in innocent transactions without creating further opportunity for those seeking to avoid payment of the tax. As a result, we have certainly achieved a clearer and more effective clause, which hits our target of preventing avoidance without unduly affecting legitimate land transactions.
As I said during the debate on the previous clause, those developing avoidance schemes will, of course, keep on trying to find new ways to avoid paying stamp duty land tax and we must be ready to respond by closing avoidance schemes quickly, and we will. We have a duty to the majority of taxpayers, who are not using elaborate avoidance schemes, to ensure that there is a level playing field for everybody, so we will be keeping this area under review.
I would like to respond specifically to some of the points raised by Opposition Members. A concern was raised about charging when partnership interests are gifted between individuals, or by an individual to an unconnected company. I think that it was implicit in what the hon. Members asked, but I need to make it clear that charging applies only to cases where there are property transactions. However, in such cases, I do not think that there is any reason why such a transaction should be dealt with more favourably than other transactions where tax would be due.
Regarding the concern about gifts of partnership interests now being chargeable, again they will be chargeable only where the partnership is engaged in property dealing or property investment. Other forms of trading partnership, such as farming partnerships, are not affected. Indeed, partnerships where land ownership is incidental are also unaffected by the clause.

Philip Dunne: I am grateful to the Minister for that clarification. Could he also clarify whether, in the case of an investment management partnership that manages property portfolios as part of its activity but not as its core activity, such a partnership would be caught?

Stephen Timms: I imagine that it would depend on the extent of the property interest, but I think that the answer is, quite rightly, yes. If the hon. Member wants to raise a more specific question with me, for example in a letter, I would be happy to provide him with an answer. Let me also make it clear that it is not the case that gifts of property from parents to children will be made liable to stamp duty land tax by the clause.
There are substantial sums at stake. The hon. Member for Chipping Barnet asked about the addition of a new partner who contributes cash. She is right that there will now be a charge, because the previous provisions were being used for avoidance purposes and it was necessary for us to ensure that that opportunity was blocked. She also asked about what happens when the profit share ratio between partners changes. Again, this applies only to property investment partnerships, but we think that it is right that there should be a charge where a partner acquires an increased right to income from the property.
This is a complex area, but the balance that we have struck in the clause, with the amendments that we tabled, is right. Certainly, the changes that we have made have been warmly welcomed. I hope that the Committee will support the clause, with these Government amendments.

Amendment agreed to.

Amendments made: No. 243, in clause 71, page 48, line 26, at end insert—
‘(13A) But the amendments made by subsections (6) and (10) do not have effect in respect of anything done in respect of a property-investment partnership established before the day on which this Act is passed if—
(a) the partnership does not acquire a chargeable interest on or after that day, and
(b) stamp duty land tax was paid in respect of each chargeable interest acquired before that day, by reference to chargeable consideration of not less than the market value.’.
No. 244, in clause 71, page 48, line 30, leave out ‘and’ and insert ‘to’.—[Mr. Timms.]

Clause 71, as amended, ordered to stand part ofthe Bill.

Clause 72 ordered to stand part of the Bill.

Schedule 21

Exemptions from stamp duty and SDRT: intermediaries, repurchases etc

Stephen Timms: I beg to move amendment No. 193, in schedule 21, page 239, line 13, at end insert ‘and’.

Roger Gale: With this it will be convenient to discuss Government amendments Nos. 194 to 210.

Stephen Timms: Schedule 21 introduces changes that will remove obstacles to competition and expand choice in the trading of financial instruments in the UK. They change the stamp duty and stamp duty reserve tax reliefs so that institutions in the City of London can take advantage of the liberalisation of market structures being introduced across Europe by the markets in financial instruments directive, or MIFID.
The rules on intermediary relief are being changed so that, from 1 November, it will no longer be necessary to report and exchange transactions in shares that are admitted to trading on a regulated market such as the main market of the London stock exchange. That will allow providers of transaction reporting services to enter the market more easily. In February, we announced our intention to extend that approach to include shares that are admitted to trading on multilateral trading facilities such as the AIM that are operated by the London stock exchange and other similar markets. Before proceeding, however, we are allowing the Financial Services Authority time to consider fully any regulatory implications. We will provide an update on progress at the time of the pre-Budget report.
The rules on intermediary relief are also being changed to allow persons who provide an over-the-counter service and who are not exchange members to apply directly to HMRC for approval as intermediaries. 
Our amendments will remove an unnecessary condition from the stamp duty and stamp duty reserve tax intermediary reliefs. From 1 November, intermediaries will be able to benefit from MIFID, the new regulatory regime. As MIFID contains provisions for making public transactions in shares that are admitted to trading on regulated markets, we have decided that it is no longer necessary for such provisions to be a condition for intermediary relief. The amendments remove the requirement to make public transactions in regulated market shares for shares that are admitted to trading only on a multilateral trading facility. Transactions will still qualify for relief only if reported to the market, so the changes are consistent with the written ministerial statement of 20 February.
We are also taking the opportunity to make a technical amendment to the definition of a European economic area state to ensure that it has the same meaning as the definition in the InterpretationAct 1978.

Theresa Villiers: In contrast to what I said about the last two clauses, I welcome the schedule. It is important that the reliefs available for intermediaries at the London stock exchange be extended throughout the variety of platforms that will open as a result of MIFID. Access to exchanges from other countries in Europe will also be opened up. The Treasury has worked constructively with industry players such as the London Investment Banking Association to get this complicated set of changes into reasonable shape. I understand that there are a few glitches, but I hope that they are of the sort that can be resolved satisfactorily using guidance.
Having spent two years of my life on MIFID, I am pleased that the Government are pressing ahead with implementation. Giving birth to MIFID was a long and painful labour. However, I had the pleasure of working hand in hand with the Treasury on many aspects of the negotiations. I am not sure that what we produced was necessarily a great result, but I hope that it might be of significant benefit in the future, both to consumers, by ensuring lower costs with savings and investments, and to the City of London, by opening access to markets across the European Union.
I pay tribute to the Government for transposing MIFID on time. Sadly, the rest of Europe has chosen not to do the same. It is a concern that, although market participants who are preparing to implement MIFID might comply with UK legislation because it will have been transposed, they will have to deal with multiple systems across the rest of Europe because our European partners have been somewhat slower to implement.

Amendment agreed to.

Amendments made: No. 194, in schedule 21,page 239, line 16, leave out from ‘Commissioners’ to end of line 18.
No. 195, in schedule 21, page 239, line 33, at end insert ‘and’.
No. 196, in schedule 21, page 239, leave out lines 35 to 37.
No. 197, in schedule 21, page 240, line 12, at end insert ‘and’.
No. 198, in schedule 21, page 240, leave out lines 14 to 16.
No. 199, in schedule 21, page 240, line 45, at end insert ‘and’.
No. 200, in schedule 21, page 240, leave out lines 47 to 49.
No. 201, in schedule 21, page 241, line 43, after second ‘time’ insert
‘is a member State or any other State which at that time’.
No. 202, in schedule 21, page 242, line 18, at end insert ‘and’.
No. 203, in schedule 21, page 242, line 22, leave out from ‘(“the Commissioners”)’ to end of line 24.
No. 204, in schedule 21, page 242, line 37, at end insert ‘and’.
No. 205, in schedule 21, page 242, line 39, leave out from ‘market’ to end of line 41.
No. 206, in schedule 21, page 243, line 11, at end insert ‘and’.
No. 207, in schedule 21, page 243, line 13, leave out from ‘market’ to end of line 15.
No. 208, in schedule 21, page 243, line 42, at end insert ‘and’.
No. 209, in schedule 21, page 243, line 44, leave out from ‘market’ to end of line 46.
No. 210, in schedule 21, page 244, line 41, after second ‘time’ insert
‘is a member State or any other State which at that time’.—[Mr. Timms.]

Schedule 21, as amended, agreed to.

It being One o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o’clock.